Lender Investors seek vehicles that provide good returns with low to moderate risk and a low level of work/supervision. That’s a pretty generic statement that means different things to different people, but some examples include T-Bills, CDs, 1st TDs, Muni Bonds, Junk Bonds, and 2nd TD’s. The market sets those yields and in 2014 they range from 1% to 12%.
Real Estate Investors/Entrepreneurs seek vehicles that provide high returns with moderate to high risk and a moderate to high level of work/supervision. Some examples here include free and clear residential rentals on the lower risk/return side of the scale up to highly leveraged construction or development investments on the high risk/high workload/high return end of the scale.
What if a Lender Investor could get a much better yield/(risk&work) ratio and the Real Estate Investor/Entrepreneur could earn a good yield at much lower risk?
A dream deal for the Lender Investor would be:
- A work free yield in excess of 12%
- More safety than a 1st TD
- Protection from litigation
- Protection from Borrower non performance
- A downside that still provided capital protection, cash flow, and a return that would be in the 4-6% range
- The tradeoff for the above is slightly higher LTV
A dream deal for the Real Estate Investor/Entrepreneur would be:
- One stop shopping for Capital
- No Fees, No Points, No interest
- No loan guarantees
- Capital investment of only 10%
- A downside that still protects his/her invested Capital
- The tradeoff for the above is slightly lower yield
PHF has devised such a system. After many years of development and construction lending, we have found a way to provide these benefits to both Lender Investors and Real Estate Entrepreneurs. The laws of physics haven’t changed, and there is no free lunch, but by putting both parties on the same side of the table, and by prudent selection of Borrowers and deals PHF can now deliver the above.